EBay Sues Craigslist, Claiming Dilution

In 2004, when eBay said it acquired a minority stake in Craigslist, the WSJ wrote that the deal, between “an Internet colossus” and a “classified-listings Web site with a cult following,” allowed Craigslist “to retain one of its most treasured assets: its soul.”

But yesterday, the unlikely union reached an impasse when eBay filed a lawsuit against closely-held Craigslist in the Delaware Court of Chancery for improperly diluting its stake. In a statement, eBay said that in January Craigslist executives took actions that “unfairly diluted eBay’s economic interest” in the company. EBay did not specify what those actions were but said they diluted its 28.4% stake in Craigslist by more than 10%. Click here for the NYT story.

“The recent actions by the Craigslist directors have disadvantaged eBay and its investment in Craigslist,” said Michael Jacobson, eBay’s senior vice president and general counsel. “Since negotiating our investment with Craigslist’s board in 2004, we have acted openly and in good faith as a minority shareholder, so we were surprised by these recent unilateral actions,” said Jacobson, who didn’t identify what those “unilateral actions” were. (The complaint was filed under seal because, eBay said, confidentiality restrictions cover some information in it about Craigslist.)

In a blog entry posted on its site Tuesday night, Craigslist said it was “surprised and very disappointed” by what it said were eBay’s “unfounded allegations.” “We have always treated eBay very fairly as a minority shareholder, and plan to continue doing so, despite this unfortunate development,” the blog said. “Coming from a shareholder that views craigslist as a prime competitor, filing suit without so much as mentioning these assertions beforehand seems unethical, and hints at ulterior motives.”

According to the NYT, publicly-traded eBay and Craigslist — whose founder Craig Newmark appears to be indifferent toward the profit motive — have a history of frosty relations. Even the story of how eBay acquired its stake in Craigslist has been disputed. Newmark says that an early employee left the company and sold his shares to eBay without consulting Craigslist. But eBay said in its statement on Tuesday that it negotiated its original investment with the Craigslist board.

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